Question

Sales (13,400 units Variable expenses Contribution margin Fixed expenses Net operating loss 160,800 107,200 119,200 $ (12,000) Required: 1. Compute the company's CM ratio and its break-even point in unit sales and dollar sales. 2. The president believes that a $6,700 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $89,000 increase in monthly sales. If the president is right, what will be the increase (decrease in the company's monthly net operating income? 3. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $37,000 in the monthly advertising budget, Will double unit sales. If the sales manager is right, what will be the revised net operating income foss)? 4. Refer to the original data. The Marketing Department thinks that a fancy new package for the laptop computer battery would grow sales. The new package would increase packaging costs by $0.40 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,8007 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $54,000 each month. a. Compute the new CM ratio and the new break-even point in unit sales and dollar sales b. Assume that the company expects to sell 20,500 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. (Show data on a per unit and percentage basis, as well as in total, for each alternative) c. Would you recommend that the company automate its operations (Assuming that the company expects to sell 20,500)? Complete this question by entering answers in the tabs below. Reg 2 Reg 3 Reg 5A Reg 5 Reg SC Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an Increase of $37,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating Income (loss)? (Losses should be entered as a negative value.) Revised net operating income foss) Reg4 >

Answer 1

	contribution margin per unit=			107200/13400
				8
1)	CM ratio = contribution/sales
		8./20
		40.00%
	BEP(units) = total fixed cost/contribution margin per unit
		119200/8
		14900
	BEP(dollars) = 14900*20
		298000
	CM ratio			40%
	Break even point in units			14900
	Break even point in dollars			298000
2)	increase in contribution			(89000*40%)		35600
	less : increase in advertising budget					6,700
	increase in net income					28,900
	increases by		28,900
3)	units = 13400*2 =		26800 units ; selling price = 20*90%=$18
		Contribution Income statement
	Sales	(26800*18)			482400
	Variable expense		(26800*12)		321600
	Contribution margin				160800
	Fixed expenses		(119200+37000)		156,200
	Net income				4,600
4)	New contribution margin = 12-.40
			11.6
	BEP(units) = (total fixed cost+target profit)/contribution per unit
		(119200+4800)/11.6
		10689.66
	Sales units		10,690
5)
	CM ratio = contribution/sales
		11./20
		55.00%
	BEP(units) = total fixed cost/contribution margin per unit
		(119200+54000)/11
		15745
	BEP(dollars) =		173200/55%
		314909
	CM ratio			55%
	Break even point in units			15745
	Break even point in dollars			314909

			20500 units
b)			Not Automated			Automated
			total	per unit	%	total	per unit	%
	Sales		410000	20	100%	410000	20	100%
	Variable expenses		246000	12	60%	184500	9	45%
	Contribution margin		164000	8	40%	225500	11	55%
	Fixed expenses		119,200			173,200
	Net operating income		44,800			52,300
c)		yes